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UK Economy Dips Back Into The Red After Services Sector Shrinks

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Britain's economy is feared to have plunged back into the red after figures suggested the powerhouse services sector shrank last month for the first time in two years.

The Markit/CIPS purchasing managers' index (PMI) survey showed a reading of 48.9 in December, down from 50.2 in November and below the 50 mark separating growth from contraction.

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Services, including construction, suffered badly in the last three months of 2012

The result marked the first dip in the services sector since a snow-related decline in December 2010 and comes after disappointing construction figures on Thursday.

Experts said the decline for the services sector, which makes up around 75% of total output, gives a clear signal that the economy went back into reverse in the final quarter of 2012.

Markit economists said the surveys across the services, manufacturing and construction sectors suggest Britain suffered its worst performance in the final three months of 2012 for more than three years, pointing to a 0.2% contraction in GDP.

This would come as a marked reversal of the 0.9% hike in the third quarter.

Service sector firms reported a slide in new work in December amid budget constraints and a lack of confidence, which was the second back-to-back decrease in new work since mid 2009.

Bad weather was also thought to have been a factor behind the overall contraction in the services sector as Britain was hit by persistent rain.

Construction firms were likewise badly impacted by last month's heavy rainfall, with the PMI survey showing activity in the sector falling at its fastest rate for six months, dragged lower by a poor performance in the housebuilding sector.

Manufacturing was the only bright spot last month with activity surging to a 15-month high in December, according to surveys, but the sector only accounts for 10% of the economy.

Chris Williamson, chief economist at Markit, said the service sector blow "raises the likelihood that the UK economy is sliding back into recession".

The UK would have to suffer two consecutive quarters in a row of declining output to be officially declared back in recession.

But Mr Williamson said the outlook for the first quarter of 2013 is also gloomy.

"Bad weather is likely to have played a role in dampening service sector activity in December, but the fact that incoming new business dropped for a second successive month suggests that underlying demand remains very weak and that activity may continue to fall in the new year," he said.

Vicky Redwood, at Capital Economics, is pencilling in a 0.4% fall in gross domestic product (GDP) in the fourth quarter.

IHS Global Insight chief UK and European economist Howard Archer is forecasting flat GDP, but said the result will depend on how much consumers spent in December.

Friday's survey does not cover the retail sector, but there is little confidence that consumer spending over Christmas was enough to offset woes in the services and construction sectors, given cost pressures on UK households.

The first official estimate of fourth quarter GDP will be released on 25 January, although consumer spending figures will not be included until the second estimate.